Relevant and even prescient commentary on news, politics and the economy.

President Bush on Free Trade and Oil Imports

Those of us who applauded the Bush41 and Clinton Administrations for moving us closer to free trade might have been tempted to cheer the following passages from the latest State of the Union addressed delivered by Bush43:

We will choose to build our prosperity by leading the world economy – or shut ourselves off from trade and opportunity. In a complex and challenging time, the road of isolationism and protectionism may seem broad and inviting – yet it ends in danger and decline. The only way to protect our people . . . the only way to secure the peace . . . the only way to control our destiny is by our leadership – so the United States of America will continue to lead … The American economy is pre-eminent – but we cannot afford to be complacent. In a dynamic world economy, we are seeing new competitors like China and India. This creates uncertainty, which makes it easier to feed people’s fears. And so we are seeing some old temptations return. Protectionists want to escape competition, pretending that we can keep our high standard of living while walling off our economy. Others say that the government needs to take a larger role in directing the economy, centralizing more power in Washington and increasing taxes. We hear claims that immigrants are somehow bad for the economy – even though this economy could not function without them. All these are forms of economic retreat, and they lead in the same direction — toward a stagnant and second-rate economy … Keeping America competitive requires us to open more markets for all that Americans make and grow. One out of every five factory jobs in America is related to global trade, and we want people everywhere to buy American. With open markets and a level playing field, no one can out-produce or out-compete the American worker.

As I heard these remarks, two thoughts emerged. First – this Administration has had a dismal record on free trade. Secondly – let’s focus on “this creates uncertainty”. Indeed, there are those who do suffer economic losses from opening our markets to global competition. Since the President is recognizing the reality of economic uncertainty, one has to wonder why he is pushing his ownership society, which is essentially efforts to reduce the means to mitigate uncertainty – such as health and retirement insurance.

Later, we heard the following:

Keeping America competitive requires affordable energy. Here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world … Breakthroughs on this and other new technologies will help us reach another great goal: to replace more than 75 percent of our oil imports from the Middle East by 2025. By applying the talent and technology of America, this country can dramatically improve our environment . . . move beyond a petroleum- based economy . . . and make our dependence on Middle Eastern oil a thing of the past.

Brad DeLong points us to the White House having to backpedal on this promise, while Kevin Drum notes that the White House continues to flip-flop on this issue. Kevin’s Political Animal colleague, Christina Larson demonstrates that the only way the government can achieve Bush’s promise is trade protection. So why do conservatives argue that George W. Bush is for free trade?

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Update on Iraq Spending

It is being reported that the Bush administration is preparing to request $70bn in additional funding for operations in Iraq and Afghanistan:

WASHINGTON (Reuters) – President George W. Bush will ask Congress for another $70 billion for the wars in Iraq and Afghanistan, congressional sources said on Thursday.

The sources said that money, which would come on top of about $330 billion for the wars so far, would be for this fiscal year. The White House likely will seek another $50 billion in emergency money in the fiscal 2007 defense spending bill for the wars, the sources said.

Just as a reminder, let’s think back to what the White House said during the run-up to the invasion of Iraq:

The administration’s top budget official estimated today that the cost of a war with Iraq could be in the range of $50 billion to $60 billion, a figure that is well below earlier estimates from White House officials… Mr. Daniels would not provide specific costs for either a long or a short military campaign against Saddam Hussein. But he said that the administration was budgeting for both, and that earlier estimates of $100 billion to $200 billion in Iraq war costs by Lawrence B. Lindsey, Mr. Bush’s former chief economic adviser, were too high.

Of course, one could make plenty of other fun juxtapositions with this large and growing bill for Iraq, including more juxtapositions between reality and what the Bush administration expected before the war.

My favorite juxtaposition today, however, is simply putting this post next to my earlier post about spending cuts.


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Are the Oil Companies Paying Too Much in Taxes?

The Tax Foundation says yes:

When the federal statutory corporate income tax rate of 35 percent is added to the weighted average of state corporate income taxes, the resulting rate of 39.3 percent means that corporations in the United States are currently at an international competitive disadvantage. In fact, as recent research has indicated, the top combined state and federal statutory corporate income tax in the U.S. is higher than any other country in the OECD.

Tax Analysts quotes one of the authors as saying the following:

Many who propose taxing energy companies more heavily than other firms, with a windfall tax, believe that these firms somehow escape normal taxpaying requirements, leaving other industries to carry a heavier load.

Of course, this statement is not what many of us who suggested a windfall tax said. It is also interesting that the authors focused on integrated oil and gas producers such as Chevron Texaco, Conoco Phillips, and Exxon Mobil as opposed to companies such as Unocal that are predominantly in the business of extracting and selling crude oil. Even for the integrated producers, the accountants allow an expense for depreciation and depletion, which James Hamilton describes thusly:

For one thing, oil companies face a significant degree of depletion of existing oil fields and depreciation on previous capital investments, meaning huge investments are required just to maintain the status quo. Standard accounting conventions recognize this by subtracting depreciation and depletion as an operating expense, with the presumption being that the investment that would be necessary in order to maintain current production would be counted as a regular business expense rather than something one needs to pay for out of profits.

For Unocal in its last full fiscal year, this allowance was almost $1 billion reducing profits before taxes to $1.83 billion. But my point about accounting profits was less these deductions for items that are not current cash outflows as much as the failure to distinguish between accounting profit and economic profit. Companies such as Unocal earn a significant amount of economic rent when the price of oil rises well above the cost of production.

Dr. Hamilton has taken an interest in the exploration and production of oil from oil sands. In his Are the oil companies earning enough profits yet?, he proposes a couple of approaches to the fact that the cost of producing oil from these sources is substantial:

Plan A is to have our elected government officials make a wise decision about what’s the best source of energy for the years ahead, find the tax dollars to pay for it all, and make sure it all gets produced and delivered on schedule. Plan B is to imagine that the desire to make a profit is so powerful that companies would be willing to invest billions of dollars trying to make oil out of sand.

While Plan A may sound like socialism to some, I’m interested. Plan B asks us to rely on the free market, which makes sense to me. Of course, the pure free market solution with a single tax rate on accounting income – regardless of whether it is economic rent or the return to capital – means that those lucky enough to already have substantial reserves of oil that is cheap to produce will receive very high profits even after the traditional income taxes that the Tax Foundation thinks are too high.

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The brave, brave men and women of the Republican party have decided that federal spending must be cut, and they have courageously decided that those who have it too easy in this country, those who need to make the sacrifices for the greater good are the poor, the elderly, single mothers, and students:

The House yesterday narrowly approved a contentious budget-cutting package that would save nearly $40 billion over five years by imposing substantial changes on programs including Medicaid, welfare, child support and student lending.

Note that this effort has nothing to do with reducing the budget deficit, since Congressional Republicans also hope to pass additional tax cuts this week that will increase the deficit by more than these ignoble, shameful spending cuts would have reduced it.

In future, when someone looks up mean in the dictionary, this action should be included as a perfect example.


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On State Spending

Chris Edwards picks on the Girlie-man Governor from my state for his claim that state governments are spending too much:

State tax revenues jumped 8.7 percent in 2004 and about 8 percent in 2005. About three-quarters of state governments had tax-revenue growth of 6 percent or more in 2005. What will the states do with their overflowing coffers? During the revenue boom of the 1990s, states allowed their budgets to bloat as they expanded programs such as Medicaid to unsustainable levels. When the recession hit in 2001 and revenues stagnated, state officials moaned that they were innocent victims of a fiscal crisis. They responded by hiking taxes and clamoring for more aid from Washington. Only a few years into the current boom, some states are already making the same mistake of overspending. In California, Gov. Arnold Schwarzenegger has proposed a budget increase for fiscal 2007 of 8.4 percent, which follows a 9.7 percent increase in 2006. This is the same governor who, in 2003, said, “if you spend, spend, spend, then you have tax, tax, tax, but all of a sudden you say, ‘Where are the jobs?’ Gone, gone, gone.” In seeking reelection this year, Schwarzenegger has found a new interest in “spend, spend, spend.” The governor of Maryland is taking the same approach as he seeks reelection. Robert Ehrlich has proposed a huge budget increase for fiscal 2007 of 11.4 percent, which follows a 7.6 percent increase in 2006. Otherwise sensible policymakers – such as these governors – apparently think that there is no harm in allowing spending to rise rapidly during booms, as long as tax rates aren’t increased.

I’ve been known to blast my governor for his promises to spend more, tax less, and reduce the budget deficit as well. But let’s check the data as far as how the share of GDP that goes to state and local government purchases has evolved since 1990, which is represented by the blue line of our graph. State & local purchases were 11.6% of GDP in 2000 – just as they were in 1990. This ratio did increase to 12.2% by 2003 but declined in 2004. Edwards, however, is referring to overall government spending, which includes transfer payments. Overall state & local spending, which is represented by the purple line, increased to 13.5% of GDP as of 2001 and was still 13.5% of GDP in 2005.

I’m delighted that we have partially recovered from the 2001 recession and that tax revenues are creeping back up. In California, we still have large deficits as our governor refuses to either reduce spending or to raise tax rates. But to suggest that state deficits in general are due to runaway spending is to show how one is either ignorant of the facts or all too willing to misrepresent the issues. So much for my attempts to be kind to the National Review.

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Bush’s Health Care Vision

Peter Gosselin and Joel Havemann of the LA Times do a good job today picking through the bits and pieces of the White House’s policy proposals regarding health care, and putting them together:

WASHINGTON – President Bush wants to bring to healthcare the same “ownership society” approach that gained him little political traction during last year’s Social Security debate but remains central to his self-help view of America.

By proposing new tax breaks for the health savings accounts he won congressional approval for three years ago, analysts said, Bush hopes to nudge the nation away from the employer-sponsored health insurance on which most working Americans depend. Instead, Bush wants to use sweeping new tax incentives to encourage workers to set aside their own money to cover routine medical expenses and get individually purchased insurance plans to meet larger costs.

Of course, Bush’s vision ignores the fact that there are fundamental market failures (e.g. asymmetric information) inherent in the market for health care, and that these market inefficiencies make it likely that market-based solutions to the US’s health care problems will be not deliver an efficient outcome.


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Baby Boomers, Social Security, and Illiterate Reporters

Kash does not think we need another commission to understand the Social Security solvency issue. Had anyone listened to Tim Russert on the Today Show, they might have another view. Russert claimed that the fact that the number of folks on retirement may double in the next several years means we have to either double the payroll tax rate or drastically reduce benefits. I guess Russert never heard of the concept of pre-funding. Now you might argue that the massive General Fund deficit means all those Trust Fund reserves have been squandered by the fiscal irresponsibility of this White House. In fact, this White House makes this very argument in defense of its Social Security deform proposals.

So do we need another Presidential commission on this issue? Not if they are going to misrepresent the issues like the last one appointed by this President. Kash is correct that economists have studied this issue and put forth a menu of reasonable solutions. The problem is that certain politicians are being less than honest about this issue, while certain reporters (e.g., Mr. Russert) act as if they know what they are talking about when clearly they do not. Bob Somerby, however, has been on the task for demanding better coverage of this issue even since April 1998. Since Bob is especially hard on Mr. Russert, it may be the case that Mr. Russert refuses to read his columns. Until he does so – can we request that NBC cease to ask Mr. Russert about his incredibly ill-informed opinions on this important issue?

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Another Commission

There was something familiar to me about this part of Bush’s SOTU address last night:

[T]onight I ask you to join me in creating a commission to examine the full impact of baby boom retirements on Social Security, Medicare and Medicaid.

This commission should include members of Congress of both parties and offer bipartisan solutions. We need to put aside partisan politics and work together and get this problem solved.

Oh yah, now I remember what this reminded me of: Ross Perot in 1992! From the 1992 Presidential Debates:

Q: how would you specifically use the powers of the presidency to get more people back into good jobs immediately?

PEROT: Step one, the American people send me up there, the day after election, I’ll get with congressional–we won’t even wait till inauguration, and I’ll ask the president to help and I’ll ask his staff to help me. And we will start putting together teams to put together–to take all the plans that exist and do something with them. Please understand. There are great plans lying all over Washington nobody ever executes.

Q: I would like from each of you a specific response as to what you intend to do for retirees relative to [Social Security and Medicare] – not generalities but specifics, because I think they’re very disturbing issues.

PEROT: On the broad issue here, when you’re trying to solve a problem, you get the best plans. You have a raging debate about those plans. Then out of that debate, with leadership, comes consensus.

Q: I want you to tell me how you’re going to be able to get the Republicans and Democrats in Congress to work together better than these two gentlemen.

PEROT: Oh, I’m sorry. Well, I’ve listened to both sides, and if they would talk to one another instead of throwing rocks, I think we could get a lot done. I’d say rather than just yelling at one another, why don’t we find out where we’re apart, try to get together, get the bill passed and give the people the benefits and not play party politics right now… That’s the way I would do it.

Bush seems to be proposing the Perot solution to these problems: we just need to put partisanship aside, work together, have a commission study it, and the problem will be solved!

I’m just curious about one thing. What exactly will we learn from the President’s new commission about the impact of the baby boomers’ retirement on Social Security and Medicare that we don’t already know from these reports:

…among numerous, numerous others.

When will it actually be time to put forward some new solutions to these well-documented problems?


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